Drawdown investors must learn to live with volatility

by Tom Bailey from Money Observer |

Those opting for drawdown must be comfortable with the fact that pension values rise and fall over time.

It has been four years since the introduction of pension freedoms, which have given retirees greater flexibility around when and how they access their retirement savings.

Those who on day one of the pension freedoms, 7 April 2015, and decided to take control of their pensions and essentially run their own pensions funds at retirement, either themselves or through the help of a financial adviser, have on the whole fared well, according to new research by Aegon.

Its analysis found an individual with a £400,000 pension pot invested in the average global pension fund in the ABI Global Equities sector would have seen their pot grow by £62,000 over the four-year period (up to 7 April 2019), while also being able to withdraw an annual income of £20,000 per year.

But, a pensioner with a pot of the same size also taking a £20,000 income per year would have seen some capital erosion had they been invested in the following ABI sectors: UK equity income, mixed investment 20%-60% shares and global fixed interest.

For example, had a pensioner been invested in the average pension fund in ABI UK equity income they would have seen their capital fall by £10,000.

Bigger capital falls occurred fund the average fund performer in the ABI mixed investment 20-60% shares and ABI global fixed interest sectors, of £31,000 and £33,000 respectively.

However, in all cases that decline in capital was significantly lower than the £80,000 total income taken.

But, despite the general positive performance of most asset classes in the four years since the pension freedoms were introduced, there has been notable bouts of volatility, leading to large swings in the size of pensioner's pots.  

Unsurprisingly, the most volatile was ABI Global Equities. A pensioner with £400,000 invested in ABI Global Equities (and drawing a £20,000 income per year), would have seen the value of their pot swing between £330,000 at its lowest point and £488,000 at its highest – a difference of £158,000.

Volatility was less pronounced for the other sector. The same pensioner invested in ABI UK Equity Income would have seen swings between £339,000 and £427,000, while had they invested in ABI Global Fixed Interest they would have seen their pot swing between a low of £362,000 and a high of £434,000.

The least volatile, as to be expected, was ABI Mixed Investment 20%-60% Shares, which swung between a low of £355,000 and a high of £405,000.

All three asset classes saw swings between their high and low of at least £50,000 – a not insignificant amount, and likely to cause panic among at least some retirees.

According to Nick Dixon, investor director at Aegon, the research underlines the importance of pensioners opting to invest their pot in the market to be able to stomach volatility.

Dixon says: "Those who opt for drawdown need to be comfortable with the idea that the value of their pension will rise and fall over time. Markets have generally performed well since the introduction of the freedoms, but even so, some of the swings in value have been quite significant.

"People who opt for drawdown need to be comfortable that the investments they’re holding match their risk appetite and should reassess the investments."

  ABI Mixed Investment 20%-60% Shares ABI Global Equities ABI Global Fixed Interest ABI UK Equity Income
Highest point £405,000 £488,000 £434,000 £427,000
Lowest point £355,000 £330,000 £362,000 £339,000
Difference £50,000 £158,000 £72,000 £88,000
Value at 7 April 2019 £369,000 £462,000 £367,000 £390,000
Income taken £80,000 £80,000 £80,000 £80,000

This article was originally published in our sister magazine Money Observer. Click here to subscribe.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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